I. Field of the Invention
The present invention generally relates to financial systems and to systems and methods for processing financial information. More particularly, the invention relates to systems and methods for providing an adjustable rate mortgage with a fixed payment.
II. Background and Material Information
In financial environments where interest rates rise and fall, borrowers frequently refinance their fixed-rate mortgages to take advantage of lower interest rates. Although in the end, the borrower may save money through reduced monthly payments, borrowers incur closing costs in order to refinance their mortgage. These costs may be significant and may include, for example, county recordation, settlement fees, appraisal fees, credit history fees, title insurance fees, and other loan fees. In many cases, it may be one or two years before a borrower is able to recoup these refinancing costs through lower monthly payments. In many situations, the borrower increases the outstanding debt owed by adding the cost of refinancing to the principal balance of the mortgage. Indeed, some borrowers may refinance one or more times within months of each refinance transaction, further compounding the costs and lengthening the time it takes to recoup refinancing costs. Additionally, refinancing of a mortgage will typically require the borrower to complete an application and provide documentation of income and employment, all of which take time and are generally inconvenient. In short, borrowers typically want to save money, have lower payments, repay the mortgage as quickly as possible, and have the peace of mind of knowing the payment amount for the entire term of the mortgage. For these reasons, when a borrower does choose to refinance, the borrower may prefer to have a fixed rate mortgage with a fixed payment at the lowest rate possible.
Refinancing may also present disadvantages to a lender. From a lender's prospective, the original mortgage note represents a future stream of income with a yield based generally on the interest rate of that mortgage. When a mortgage is refinanced, the income stream stops. Although in the example above a new fixed rate mortgage may take its place and provide another income stream, the new, refinanced mortgage is typically at a lower rate—representing thus a lower yield. Moreover, lenders may sell (or securitize) one or more mortgage notes to investors. Like lenders, investors prefer higher yields and thus prefer to have a low refinancing turnover. Additionally, when a borrower refinances a mortgage, the borrower may refinance with a different lender, which reduces the original lender's servicing portfolio.
An alternative to a fixed-rate mortgage is the adjustable rate mortgage. Unlike the fixed-rate mortgage that has a fixed interest rate for the term of the mortgage (typically 15 to 30 years), the adjustable rate mortgage has an interest rate that is periodically adjusted (per the terms of the mortgage) to more closely coincide with the then current interest rates. For example, when interest rates fall during the interest rate reset period, the adjustable rate mortgage adjusts its interest rate lower, which results in lower monthly payments. On the other hand, when current interest rates rise during the interest rate reset period, the adjustable rate mortgage adjusts its interest rate higher, which results in higher monthly payments for the borrower.
In environments where current interest rates are falling, borrowers may use an adjustable rate mortgage to avoid refinancing their mortgage and to avoid the costs associated with refinancing. Nevertheless, in environments where current interest rates are rising (or are expected to rise), some borrowers view the adjustable rate mortgage as too risky because the interest rate and the corresponding monthly payments may be adjusted higher. Borrowers may also be concerned that they cannot afford the higher monthly payments. Accordingly, a mortgage product is needed that provides the borrower with some predictability and reduces the call for refinancing in both increasing and decreasing interest rate environments.